The Week In Review: Derwent defies lacklustre market

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The Independent Online

DERWENT

Backing a stock so tied into the property market may seem contrarian in the current climate, but Derwent London, which leases office space in central London, could provide a buying opportunity for those willing to hold on.

Derwent was formed earlier this year when Derwent Valley Holdings merged with London Merchant Securities. Despite some misgivings in the market over the deal, the integration seems to have gone to plan, and produced a solid set of debut interims this week.

Highlights included a rise in net asset value of 12.5 per cent to 1,931p per share, along with a 26.8 per cent rise in profits. The value of its London portfolio, which accounts for 90 per cent of its property, was up by 10 per cent. Eye-catching deals included putting Rio Tinto up in Paddington and leasing space in Victoria to Burberry. Rents in the West End have continued to rise over the past three years, but Derwent, which is predominantly focused on the area, asks only £24 per square foot.

With the shares looking cheap, at 14 per cent discount to the June net asset value, strong performance so far this year and good prospects, this looks like one to buy and stick in the back pocket for a while.

ARC INTERNATIONAL

After spending years in the wilderness, ARC's recovery under Carl Schlachte, president and chief executive of the semiconductor technology developer, has been slow and steady, but is starting to bear fruit. An agreement with Intel, unveiled this week, has been called a "breakthrough deal" by analysts as it could bolster ARC's royalty by £3million a year by 2010.

Intel, which dominates the mobile laptop market with its Centrino chips, is one of the largest suppliers of Wi-Fi and Wimax chipsets in the world, shifting 200 million Wi-Fi chips last year. Owing to the volatility of the market and ARC's slow progress turning around the business, it is perhaps unsurprising that its valuation trails that of its main rivals. ButARC's recent recovery does not appear to be another false dawn. Buy.

SPORTECH

Gaming company Sportech is starting to see the interest charges on its floating debt starting to bite. Furthermore, the Competition Commission's probe into its acquisition of Vernons Pools from Ladbrokes has meant certain product upgrades have been delayed, so this year's results may not be as rosy as had been expected.

However, the decision by the commission to (provisionally) allow the acquisition will create a single pools brand under a single owner committed to the product. Sportech's shares currently trade at 8.6 times 2008 earnings, by when the board's plans should be starting to show fruit. The fall in the price should be taken as another buying opportunity.

ASHMORE

Investing in emerging market debt might seem like financial suicide in light of the crisis gripping the credit markets, but this week's debut full-year results from alternative asset manager Ashmore Group should tempt some to invest. The one disappointment among the numbers was a drop in performance fees. Even so, given the turmoil in the credit markets, any performance fee is creditable.

The stock trades on slightly more than 13.5 times forecast 2008 earnings – not cheap but an attractive price given its strong position in a niche market. Ashmore has demonstrated its ability to generate excellent returns for investors over the long term. Retail investors could do much worse than follow the institutions and tuck some away.

CHARTER

Brave punters taking a gamble on engineering group Charter when the market bottomed out in early 2003 have made a bundle – something in the region of 2,300 per cent or thereabouts. But the lottery win for investors is not just down to the bull market – Charter has had a spectacular turnaround and another set of forecast-busting first-half numbers this week suggest there may be even more upside.

Charter's stock trades on 13.7 times forecast 2008 earnings, attractive enough, but that number will come down as analysts upgrade forecasts. Charter is no longer being given away, but this business is in superb shape even with a dollar headwind. Although there is little in the way of a dividend yield, for growth investors Charter is a must have. Buy.

ENNSTONE

Thanks to global consolidation that culminated in the takeover of Hanson earlier this year, Aim-listed Ennstone is now the last publicly-owned aggregates group left in the UK. The company has aggregate reserves in Scotland, Poland and the eastern United States that should last another 25 years at current rates, with the potential to make that last a further six years through successful planning applications.

Ennstone's stock trades at over 15 times forecast 2008 earnings, a rich valuation given the ongoing dollar weakness and uncertainty over its US operations. But the business is making good progress in restructuring, recently raised £50million of new capital and prices are working in its favour. As an asset-based business there is room for upgrades to the valuation. Worth a punt.

TULLETT PREBON

When the stock markets correct there is a tendency to throw the baby out with the bathwater, and this summer has been no different. The correction caused by woes in the credit markets has been a boon for inter-dealer brokers such as Tullett Prebon, and the phones have been ringing off the hook – as proved by record trading volumes in June, July and August.

Tullett shares trade on an undemanding forward multiple of 12.5 times forecast 2008 earnings, a significant discount to its nearest UK peer, ICAP. This is a quality business and a good hedge against weaker markets – which every portfolio should have. Buy.

HAIKE CHEMICALS

Haike is a speciality chemicals and petrochemicals groups based in Shandong province in northern China. The company makes light fuel oil, chemical light oil and liquefied gas for sale within the Chinese market.

House broker Hanson Westinghouse believes that Haike is on course to deliver full-year results of $17.5m of pre-tax profit, generating 15.1p of per share earnings. That puts the stock on a multiple of just 8.8 times, falling to under five times forecast 2008 earnings. It is worth repeating the risk involved here. This stock is only for investors who can afford to take huge risk with their money – but if Haike gets the rub of the green and hits its full-year forecasts the shares will begin to look ludicrously cheap. A very risky buy.

AGGREKO

The use of electronic appliances is fuelling a boom in demand for power, but many countries do not have the infrastructure capable of matching supply with demand. That is where Aggreko steps in, by providing temporary power, and the stellar returns shareholders have enjoyed over the past few years look set to continue after another forecast-busting set of first-half results.

Aggreko is in excellent shape, and although the shares are not cheap, trading on almost 19.5 times forecast 2008 earnings, that number is bound to come down as analysts upgrade their estimates. Given the strength of these results, at least 10 per cent should be added to forecasts. Buy.

DIGNITY

Dignity is the UK's only quoted funeral services provider, and its shares have shown plenty of life over the past three years – up 220 per cent since listing in April 2004. Despite another encouraging set of numbers this week, investors must be wondering if the stock, once billed as a utility with growth, is now just a utility. Growth is slowing, and the company has acquired another 21 locations in the first half, which will result in a significantly higher capital spend of £16.5m.

The shares now trade on more than 20 times forecast 2008 earnings. There is still much promise in this business, and unless the elixir of life is discovered any time soon, its earnings look as defensive as it is possible to get. But 20 times earnings is a rich valuation on the back of these numbers and taking into account the £275m of debt on the balance sheet. Hold.

CODA

Coda's company's Executive Share Ownership Plan was due to unwind in December, which would have resulted in 4.3 million shares – 6 per cent of its issued share capital – being released on to the market. Instead, Coda has decided to roll over the plan, alleviating those concerns.

Coda – which develops financial accounting software – has made progress with Neon, the new version of its financials product. Many of the company's clients have started testing the product, and Coda has signed up Avis Europe as a new client. With sales up 8 per cent and net cash very strong during the first half, the only concern for investors looking at Coda is the valuation. It sits on a valuation of around 17.5 times, which is at a premium to its peer group. Yet with upside to around 200p, or 219p on some estimates, Coda looks a good bet for investors. Buy.

Bovis looks safe as houses, but the market's not excited

Running a publicly quoted house-builder must be a bit depressing – no matter how buoyant the market, or how much consolidation goes on, or how often forecasts are met, the sector is still valued at multiples that assume disaster is never far away.

First-half results from Bovis Homes this week were again at the top end of forecasts, with pre-tax profits 10 per cent better than in the same period of 2006, at £58.4m, on a 3.8 per cent jump in revenue to £259.9m. Volume of home sales for the first six months was marginally lower, offset by a higher average sale price.

That said, Bovis doesn't have the right exposure to set the pulse racing. It does not operate in London or the South-east, where house-price inflation has been highest. It does build luxury homes, but it concentrates its business in the smaller, starter-home market. Its average selling price rose, but at £189,600 it is the lower end of the market, potentially most at threat from higher interest rates and the credit crunch.

The shares are supported by a 5.4 per cent dividend yield and for low risk income-seekers the stock looks worth backing. But sector consolidation could slow, and even at 8.4 times forecast 2008 earnings, the chances of the market re-rating the stock any time soon look slim. If you're already in, the stock is worth hanging on to. The balance sheet is solid, with £108m of cash and almost no debt, but at this stage in the cycle there look to be few catalysts to boost the shares. Hold.

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